Monday 2 July 2012 19.03 EDT
First published on Monday 2 July 2012 19.03 EDT

The government will announce measures to end the "export trade" in vulnerable children around the English regions that has led to concentrations of care homes, some a short walk away from convicted sex offenders.

Ministers have been alarmed by evidence that children in care are particularly vulnerable to child sex exploitation, with some residential homes being specifically targeted by abusers. This risk has been heightened because private industry has set up clusters of care homes for vulnerable young people to save costs in cheaper areas – such as the deprived north-west or along the coast.

About 45% of children in care live outside the local authority that has responsibility for them – and a quarter of England's 2,074 care homes can be found in the north-west. Concern grew in May after nine men, predominately of Pakistani heritage, were found guilty of grooming and abusing young girls in Rochdale, all of whom were known to social services during their childhood. There are 41 children's homes in Rochdale and in May the leader of the local council admitted vulnerable children should no longer be sent to care homes in the borough because their safety "is not being guaranteed".

Tim Loughton, the children's minister, said in his own constituency in West Sussex the police had produced "heat maps" showing the location of children in care and known sex offenders, showing they are often on the same street. "Can social workers or directors of social services look me in the eye and say this is suitable? Can children be placed near where [sex] offenders are known to be? Children here are often hundreds of miles from home, friends and family," he said.

Such was the concern that ministers accelerated a review led by Sue Berelowitz, the deputy children's commissioner. She warned children in care homes were being subjected to sexual abuse of a "violent and sadistic nature". Her work showed perpetrators came from all ethnic groups, as do their victims, who are as young as 11 and are largely but not exclusively girls.

"I've been in the children's services field for a very long time, and I have never come across the scale of violence and sadism that I'm encountering now. The stories that children and young people tell us are truly horrific," Berelowitz said.

Loughton said there were many reasons for the current regime failing. Although police figures show that an estimated 10,000 children go missing from care every year, the government's official data recorded only 930 children disappearing.

A new system of measuring how many children go missing each year would be used, Loughton said, while more would be done to ensure that children's homes were properly protected and located as police and local authorities were not currently able to share information about where they are. He also wanted more to be done to make sure children were sent to homes closer to where they are from – social services will have to prove good reason for sending a child to another location.

Despite the costs involved, Loughton said that care homes were also not being evaluated correctly. The children's minister said £1bn a year was being spent on 5,000 children in care – an average of £200,000 per child. Yet Ofsted had found only 2% of care homes to be "unsatisfactory". Loughton said a new tougher regime, less focused on processes and buildings, would be in place. "My hunch is that [under] the new inspection regime that 2% [of care homes which fail] will be in double figures."

Ann Coffey, Labour chair of the all-party parliamentary group for runaway and missing children, said there was "effectively a form of export trade of children in the English regions". With three-quarters of care homes in the private sector, questions had to be asked about "the leadership of these homes in the view of profits that they make".

There has been a rise in financial firms buying up companies that provide social services. Baird Capital, a private equity firm, owns Castlecare's 40 children's homes – which in 2009 was in the headlines for charging £378,000 to a council for one child. Two of England's three biggest private providers of foster placements are owned by City firms.

Loughton said he was "concerned that there has been a move into the market disproportionately by a number of private equity firms … although in many cases they provide very good care".

The Children's Services Development Group (CSDG), a coalition of leading independent providers of residential care, special education and fostering services, said it welcomed a government review into residential children's homes but argued that "sometimes the best decision for a young person is to take them away from a geographical area where they have experienced harm and abuse.

"Placement decisions should be made on the basis of quality of provision and whether it is delivered in a safe and stable environment, rather than the type of provider delivering the service. CSDG would urge that commissioning decisions are made on the basis of need and that no compromises are made on quality."

Matthew Reed, chief executive of the Children's Society, said: "It is a scandal that children who go missing from care are being systematically failed and placed in great danger by a system that is allegedly there to protect them.

"Today's speedy government response is very encouraging and sets out a comprehensive plan to take forward many of the recommendations of the shocking parliamentary report.

"The recent exposure of horrific cases of sexual exploitation, trafficking and other shocking crimes leave no room for doubt that there are huge gaps in the system that must be closed urgently. Ultimately what will make a major difference going forward is how children are treated by the professionals there to protect them. There must be a dramatic change in attitudes and culture towards these very vulnerable children."

• This article was corrected on 4 July 2012 because the original said Tim Loughton's constituency is in Kent. The MP's constituency of East Worthing & Shoreham is in West Sussex.